According to our guest Mark Percy, it is affordability that sits at the heart of limited new housing supply housing, combined with limited development sites and planning delays. He suggests that this will drive major changes with more demand for smaller houses and apartments already occurring.

“The demand for smaller homes is not only driven by  affordability. The increasing demand and acceptability of this form of housing  is complex as it is being driven by many market factors such as the location of existing infrastructure, work, family, shops, restaurants, theatres etc. Buyers will compromise their expectations on a dwelling size to be located as possible to this infrastructure and support network. This has lead to the continued infilling of our major urban areas which has the added benefit of making better use of existing infrastructure. This has the added benefit of reducing pressure on providing infrastructure on the edges of the existing urban area but increases the demand for housing in the inner urban areas.”

However in the immediate future Mark believes that the biggest hurdle for the residential market is that there has been a shift in market conditions because of the lack of confidence among buyers and, although manifest in the issue of affordability, it is he believes, a very complex issue.

The Residence, Sydney“Among owner-occupiers, there is a lack of confidence and many people are simply not moving from their existing home. There are many reasons for staying put; many are financial but there are also social and demographics working here.”

Mark believes that buyer motivation and timing have shifted which he sees as key reasons for the big drop in demand and hence the fall in home building construction. The cost of moving and poor capital growth are other factors Mark pointed to.

In NSW, because of stamp duty incentives available before 30 June 2012, we saw that investors and first time buyers below $600,000 were very active in the market. But I think it could be argued that this may well have created a distortion in the overall market as many developers moved to change their product offering to meet the inflated demand in this sector of the market caused by the temporary incentives on offer. Immediately after 30 June, there was a noticeable drop in demand for new housing. I think that generally the product range and quality needs to be sufficiently broad to attract a cross section of buyers – focusing on one sector of the market is risky, particularly when demand for a particular sector of the market can be affected by Government incentives being introduced or withdrawn through the life of a project” he said.

But while Mark agrees that incentives create activity in the particular sector of the market to which they apply, he believes that despite the incentives that were on recently on offer, the wider market appears to have a lack of motivation and confidence.

While affordability is a big issue, Generation X & Y are simply not driven to buy a home as any sort of priority, unlike their Baby Boomer parents were. This has reduced the formation of new households in this age demographic.

Mark sights the clear trend that Gen X & Y are more inclined to want to travel and stay at home longer than their parents did. Homes, either big homes or smaller ones are today not on their short term agenda. But Mark thinks that the industry needs to think about how this will play out in the mid to term when Gen X & Y finally “settles down” – the development industry needs to focus a lot of attention and forward planning on this group of buyers to understand their drivers when it comes time to purchase a home and ensure that housing forms provided are suitable for this market.

Clearly the market has changed in an almost generational shift in priorities and economic circumstances. They are happy to stay at home longer. Many are marrying and having children later and this trend, combined with what plans and aspirations mum and dad, the baby boomers, have is creating a fascinating mix of challeges and opportunities.

“Mum and dad might down size and help the kids with by contributing some cash to assist their children to buy a home but this does not address the deeper issues of affordability.”

Major challenges and hurdles faced in the residential sector

During my conversation with Mark Percy it became clear that 35 years of experience have helped to focus his thinking, when it comes to the industry’s structure and the hurdles the residential sector faces. However Mark also clearly sees how improvements can be made and is keen that Cbus Property is, in its own way, able to play a part in this on-going process.

When you analyse the development industry’s hurdles, some of the current hurdles are big ones and, as might be expected, many are to do with availability finance. Finance feeds into every aspect of the market, it impacts on the amount that individuals can borrow and therefore how much they can pay for a home, but this is only one area of note, even if it’s a very visible issue and always talked about” he commented.

But Mark also points out that there are other major issues and these impact on the sustained record of low levels of housing construction in recent years that has limited new supply.

The industry faces development funding issues, it’s a really big issue and it is impacting both large and small players.

“Clearly anyone would be able to point to the fact that lending conditions have dramatically shifted since the GFC and it could be said that the same lack of confidence among buyers has impacted the lenders who have become, by circumstance, much more conservative in their lending.

This is not to suggest this is an overall bad thing, but it has caused a big shift in how the industry plans, manages and delivers projects. One key point is that equity levels have moved to new higher ground, developers are now required to contribute much higher equity, close to 30% or 40%. I think that for many developers this is the issue of the decade.

Across the industry few would not agree with Mark’s comments as there is now a clear struggle to breach this equity gap and secure a very high level of pre-sales off the plan. This is impacting on how projects are being sold and marketed. Banks often have a pre-sales requirement reaching 100% of the senior debt facility limit before they will commence funding a project.

“Some of the key reasons organisations are looking to partner with Cbus Property is our experience because and financial capacity.

“Obtaining ever more pre-sales requirements are a trend we are not exempt from and this is creating other challenges. The market is more product / affordability  sensitive and needs to design for the off the plan market – this, for example, has reduced the number of larger 2 and 3 bedroom apartments in projects as these are generally difficult to sell before construction and securing project funding is often viewed from this perspective. This feeds into affordability at every level of the market – smaller apartments are much easier to sell off the plan and therefore help to somewhat de-risk the project. Smaller apartments go some way to assisting with affordability constraints.”

Affordability is a complex issue, it’s easy to point to one area or another, like interest rates or high selling prices, but in reality many factors are involved. Everyone talks about this issue and there does need to be a concerted effort to improve affordability.

“Land value is a big issue. If you own a parcel of land with no particular motivation to sell, then you can simply sit and wait for a high price. Construction costs are often mentioned but I believe we generally build efficiently. Builders’ margins are generally low for the risks they are responsible for. Quality has to be there and there is no room to build below a particular quality standard to make a home more ‘affordable’ – that can simply devalue the housing stock, if you create rubbish you simply create another set of problems and destroy the reputation of the company and the overall industry.

“There is also the very real impact of how government levies and charges are imposed. This area is one of the biggest costs to developers, the fees are payable up-front, and so these costs have to be financed and add to finance costs from day one. If the majority of levies could be paid towards the end of the project, this would be of much greater assistance.

Like many others in the development industry, Mark points to the need to balance just how much can be charged against new developments by authorities and government and how services should be paid for. The real point is should all of this cost be captured up-front, from the developer and the initial buyer? After all, most of the services will be there for all of the foreseeable future, not just for the current generation.

Developers build roads and other forms of infrastructure, built and then used for decades. These are dedicated to the local council or supply authorities who in-turn collect a revenue stream, in the form of rates for local councils while utility companies get a parcel of customers that the developer delivers.

Stamp duty has a major impact on affordability and the rate increases with the value of the home, it impacts greatest on the mid and upper market. As evidenced in NSW before 30 June this year, when it was waived for new dwellings under $600,000, affordability can be  improved and buyers are motivated to commit to a purchase with this form of assistance.

I think that Mark’s comments help to move affordability beyond the monthly interest rate cycle, or reports of the ups and downs of house prices into a complex array of issues at every level of the market.

Mark commented to me that he encounters this topic frequently and he continues to argue that this is a multifaceted topic and in the next post we will look at the impact of planning policy, another core topic, but one that also impacts affordability.